Yesterday, we had what could be the last government employment data (Jobless Claims) for the time being. The data was, more or less, as expected. Combining the Jobless Claims data with Challenger Job Cuts data and yesterday’s ADP employment data tells a story of an economy in which firings have slowed, but hiring prospects remain dim. Meanwhile, investors continue to prepare for an eventual acceleration of growth and inflation which does not appear to be on the horizon. This has caused a bifurcation among fixed income investors. Some investors want little or no risk and are holding large quantities of cash. Others are reaching for yield, almost recklessly. As with most things in life, the correct answer lies in the middle. Let’s break it down.
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The Challenger Job Cuts data indicate that employers reduced staffing by an annualized 19.1% in September versus an increase of 56.5% in August. The good news is that the pace of the increase in job cuts slowed in September. The bad news is that this was the fourth consecutive month that job cuts increased. Job cuts for Q3 2013 were up 25% versus Q3 of 2012. Healthcare led the way with the most job cuts for the third time in the last five months.
Initial Jobless Claims came in at 308,000. This was up from a prior revised 307,000 (up from 305,000), but lower than the Street consensus forecast of 315,000. Continuing Claims increased to 2,925,000 versus a prior revised 2,821,000 (down from 2,823,000) and a Street estimate of 2,805,000. There were no unusual phenomena in the Initial Claims data, but Continuing Claims were impacted by Nevada and California catching up on claims. Remember, Continuing Claims are reported with a one-week lag versus Initial Claims. Continuing Claims data do not include the 1.47 million Americans (up 121,460 – also playing catch-up) receiving emergency extended benefits.
Some assess Jobless Claims from a glass half full perspective, others from a glass half empty point of view. Bond Squad believes that many economists, strategists and market participants are looking at the wrong glass.
On the glass half full side we have Bank of Tokyo-Mitsubishi UFJ Chief Financial Economist, Chris Rupkey who opined that the recent decline of Initial Jobless Claims to the low 300,000s indicates that the economic expansion is “going great.” Others, such as Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. stated: “Companies are lean and mean, but the hiring that usually goes along with claims like these just isn’t happening.”
Bond Squad believes that many experts are looking at the situation incorrectly (or at least are making public comments to that effect). We are in a new global economy. Labor has been commoditized. The U.S. economy has become a technocracy. At the present time, individuals with specific and often unique skills can find employment in which they are well-paid. The vast majority of the population with more common skill sets is left to compete with their fellow U.S. workers, foreign workers and automation. Most jobs which cannot be automated or replaced with technology are of the low-paying service variety. Other than in the Fed-fueled housing industry, the service sectors is where most jobs have been created. During the past year, about 75% of the jobs created have been part-time jobs. Job growth has averaged 183,000 per month, year-over-year. This is thought to be just above the growth in the working age population. The Sequester is not the only reason for slack hiring. Job growth is happening at pace which is consistent with structural economic conditions with the added tailwind of extraordinary monetary policy accommodation.
Some pundits believe that repealing the Affordable Care Act would encourage full-time hiring. That may or may not be true (research conducted by PNC Chief Economist, Stuart Hoffman) indicates that only one in six small businesses surveyed plans to hire. Approximately 15% of businesses blamed the Affordable Care Act for not expanding payrolls. That 15% of businesses blaming new healthcare regulations is worrisome on two points. First: 15% is a sizable portion of small business. Secondly, that means that 85% of business who do not plan to hire are not hiring for reasons other than healthcare concerns. According to PNC, the main reason small businesses are not hiring is due to a lack of customers.
There is the possibility that Affordable Care has had a negligible effect on hiring, in the absolute sense. It might be true that healthcare regulations are discouraging businesses from expanding their payrolls. However, it might have resulted in two part-time workers being hired instead of one full-time worker. In the end, the job growth we are experiencing might be all the U.S. economy is currently capable of producing.
How do we get out of this vicious cycle? Creating jobs in industries which labor cannot be easily exported, such as domestic energy production and transmission would help. Allowing consumers (and eventually, the nation) to delever would have the potential of strengthening the foundations of the U.S. economy. Until the structure of the economy is repaired, sluggish growth and slack low-wage hiring could be the norm. While we do not see a deflationary scenario materializing, inflation could remain very mild, in spite of money printing.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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